Cisco remains milch cow, can't read customers

When you're as big as Cisco Systems Inc, effecting a company-wide strategic turnaround takes some time. As the company reported its first fiscal quarter results yesterday, CEO John Chambers gave the latest chapter in his "show-me economy" story, saying eight-quarter-old strategies are bearing fruit, but hinting that the immediate future may not be rosy,

Kevin Murphy writes

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On the positive side, Cisco reported net income for the three months to October 26 of $618m, up from a net loss of $268m a year ago, on revenue that was flat sequentially but up 9% on last year at $4.8bn.

On the negative side, the firm's book-to-bill ratio was "down more than a little bit" below 1, and Chambers said sales in the current quarter will be flat to down between 3% and 4%, as visibility into enterprises "continues to contract."

"In areas we can control or influence... I continue to be more optimistic than I was going to the last quarter... my confidence is continuing to increase," Chambers said in a conference call with analysts and investors yesterday.

"However, from an external perspective, customers are becoming more cautious as visibility into their own businesses continues to contract," Chambers added. "From that point of view, I have more caution than in previous quarters."

The "control or influence" mantra Chambers has been using for some time. In fact, the business summary quoted above is an almost verbatim repetition of what Chambers said in August when commenting on how he expected the first fiscal quarter to pan out.

Chambers said that by controlling things such as product pricing, and by consolidating suppliers in order to gain volume discounts, Cisco managed to increase key metrics such as gross margin and cash flow to approaching 1999 peaks.

But Chambers cautioned that the company still cannot tell how much of its good performance reflects the market, and how much reflects business won from competitors, many of which, he said, are still losing money.

He said in the last six quarters since Cisco's outlined its current strategic vision, Cisco's revenue has increased 9% from $4.3bn to $4.8bn, while the combined revenue of an index of its top ten North American rivals has declined 48% from $11.2bn to $5.2bn.

Chambers said the four-pronged strategy the firm has been working on is bearing fruit, and that much of the strategy the company is putting in place now is more likely to have a big impact two to four years from now, rather than providing immediate returns.

After talking to customers, Chambers said he identified several areas enterprises are interested in: security, IP telephony, storage, wireless LANs, and data/voice/video convergence. In the service provider market, Chambers said he expects things to get worse before they get better for several quarters.

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